Friday, February 22, 2013

The Economic Competence Of Politicians

Is it advantageous to have leaders and policymakers who are technically competent? As in having formal education in their area of responsibility? Would you expect a doctor to be Minister of Health and a public finance graduate in charge of the Treasury?

You’d think that this is a pretty dumb question – of course they should be. The funny thing is however is that most are not, and voters are quite happy to put them there.

You could say this paradox is due to limited supply, if technically competent people don’t choose to run for office and voters are presented with less-qualified candidates. In a parliamentary system of course, voters have little direct influence on who is chosen for which jobs, but you’d think there would be some incentive for a majority party leader to choose the most competent people on hand.

Nevertheless, its quite interesting to find that people are pretty comfortable choosing unqualified candidates…except when there is a crisis. This VoxEU article examines this whole question (excerpt; emphasis added):

The technical competence of economic policymakers
Mark Hallerberg, Joachim Wehner, 14 February 2013

…Should policymakers be experts in their fields? This is an especially relevant issue in the midst of a financial crisis. One potential reason for crises is that the incompetent people made the wrong decisions. If one were to replace these leaders with competent policymakers, then the crisis might end and there might not be crises in the future…

…The almost simultaneous appointments of Lucas Papademos as prime minister of Greece and Mario Monti as prime minister of Italy in November 2011 are examples of leadership changes that were meant to bring more competent people into government…

…The truth of such assertions is – at least on average – an empirical question. After all, it is not a priori clear that technical competence in itself is a desirable trait. The staffs of ministries and central banks can number into the thousands and even the tens of thousands. A good manager with little economic competence may do as well, or better, than an economics PhD; A more politically inclined economic leader may have more success in selling and implementing a given policy than a former economics professor

…We consider political competence versus technical competence. Political competence, in turn, can have two interpretations. One is political skill; a finance minister with no economics training may be effective because she can impose spending cuts on her ministerial colleagues because she has the political ability to do so. A second interpretation is that an appointment satisfies a given constituency and has political value regardless of the (political) skills of the appointee…

…On the demand side, we find that governments appoint more technically competent economic policymakers during financial crises…

…A second demand-side reason for a competent economic leader relates to partisanship. Governments on the left that represent largely labour power (e.g. Hibbs 1977) have to gain credibility with capital markets to finance the state, and they may be more likely to appoint trained economists as either finance ministers or central bank governors…

…Third, new democracies select more technically competent leaders. Such governments have greater incentives to signal technical competence than their counterparts in established democracies…

…A fourth finding on the demand side counter to our expectations – Eurozone countries are less likely to have prime ministers with an economics education…

…A demand-side perspective on competence, however, is incomplete – another relevant factor is the supply side. Why does the availability of potentially competent leaders vary across countries and across time?

The first such finding concerns a difference in how parliamentary and presidential systems appoint their cabinets, which in practice means that presidential systems have more technically competent finance ministers. In parliamentary systems, prime ministers may be constrained to select finance ministers from members of parliament…

…A supply-side perspective also suggests that the number of economically competent individuals who could be appointed to the cabinet typically declines with a government’s time in office…Indeed, the longer a government is in office, the less technically competent are the finance ministers appointed, but the more competent are central bankers.

Taken together, our results have several interesting implications, and we conclude with just two…

…We find that levels of economics education among finance ministers are substantially higher in new democracies than in old ones…

…our results suggest that banking crises can lead to big jumps in the technical competence of central bank heads in terms of their education – the appointment of an economics PhD as a central bank president is 22 percentage points more likely during a banking crisis.

Interesting findings, yes?

I’m especially taken with the last bit I put in bold – the longer a government is in power, the less likely a finance minister would have an econs degree (hold your sniggers: less technically competent doesn’t equate to being incompetent) and the more likely the central bank head would. That seems to fit in with Malaysia’s own experience over the years.

But does technical competence matter in terms of actual policymaking? I think, conditional on having good advice (that’s actually listened to), any person of ability can run an economy.

Which of course leaves the very open question of who’s giving the advice, and whether its any good.

Technical Notes:

  1. Hallerberg, Mark, & Joachim Wehner, "The Technical Competence of Economic Policymakers", VoxEU article, February 2013 (accessed February 22 2013)
  2. Hallerberg, Mark, & Joachim Wehner, "The Technical Competence of Economic Policy-Makers in Developed Democracies", Working Paper, available at the Social Science Research Network, February 2013

14 comments:

  1. I am tempted not to comment here for fear my comments may mess the almost perfect prose presentations of the blogger.

    But sometimes one must yield to some temptation if only to lighten the journey..

    The situation faced by ministers is akin the examination invigilator. Just minutes before the end of the paper, a student raises her hand and the invigilator walks over to her. She asks whether there could be a mistake in one of the questions. Let's say it's the printing of the value of a constant needed to be used in a calculation of an economics formula. If the invigilator is only trained in physical education, he won't be able to give the right answer. He cannot even make an educated guess at the risk of making an uninformed one which can lead the entire class to derive an answer wrong by orders of magnitude, depending where the decimal place is located.

    Sometimes such a risk taken can lead to exceptionally high project costs. Like, say rm12 billion.

    Which leads us back to the three key words:

    - good
    - listened
    - ability

    in...'conditional on having good advice (that’s actually listened to), any person of ability can run an economy.'

    One guesses a good advice has four components, namely technical, wisdom, operational and context.

    If the advisor is top-notch, he or she would have overcome his or her own limitations from working too long in the post to make sure that all four components remain sharp and relevant to the situation presented. Like the time-and-information-constrained one in the examination hall.

    Seldom is this the case and that's usually from sitting too long in cozy comfort of public sector posts.

    And if the advisor is from the private sector, there's a tendency to overcompensate with more technicality in which case the listener will be more lost if the listener is not schooled in the same field.

    Which implies policy-output advice is only as effective as listener-input reception.

    Therefore, if the listener doesn't know the subject matter, how to granulate the advice so that its four components can be transmuted into workable decisions that won't carry more risks of bigger failures or fall-outs down the line, even if these decisions are delivered with the usual generic panache of generalists such as proliferated out of the old democracies?

    Maybe the new democracies in realizing this have learned from the mistakes of the old countries.

    It remains to close the loop. Sometimes the problem not seen is how the communication is not done to those who are to be on the receiving end of the policy or decision.

    A variant of this is the MOH. It is possibly an unspoken guideline that the minister should not be a doctor because such a person would tend to talk down to his subordinates and if they are themselves doctors not used to listening to peers of equal rank, the advice or orders may be harder to swallow. That's why they make use of lawyers who can be blamed for any snafu in any field. By the same argument but for some other mystifying reason, they won't make use of economists.

    It remains to ask if the MOE should be educationists. That's easy to answer in our case. It doesn't matter. For the situation is so bad and hopeless, no genius in any field can salvage any hope from the damage done.

    Don't believe me? Just walk into the UM bookstore and see for yourself the collection which are more likely recommended texts for the prevailing courses. Seems some publishers are wholesale preferred. Look at the ceiling and hope Mr Spock will beam you up. Because there is no more life below to create better reflection and application.

    Maybe, that's why all are only asked to listen these days. However, it's still moot whether the communication itself has any value. No?











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  2. "conditional on having good advice (that’s actually listened to), any person of ability can run an economy."

    I would rather think that is a pretty reckless contention especially with regard to the second half of the above phrase.

    Nope...not any person of ability can run an economy, not even by a long shot. Imagine a situation wherein a Minister of Finance is confronted with policy alternatives and need to make a decision premised on accurate technical assessment, the mere reliance on expert advise would be insufficient if the MOF himself/herself is unable to comprehend the technicalities of that advise or objectively evaluate that advise to arrive at the optimal outcome.

    I would rather have a MOF who is capable of understanding the nuances of micromanagement as much as one who is capable of conceptualising or formulating the broader policy framework itself.

    I would be more inclined to trust someone's who is competent at modeling different scenarios and drawing the valid conclusions therein rather than one who relies solely on expert advise. And I would be more favourable towards a MOF who is able to argue or debate policy with his adviser(s) than one who is merely a good implementer of proposals crafted by others.

    I do agree that a PM is bound by party strictures and the limitations of the pool at his disposal when it comes to appointing his Ministers. But he/she should understand that once a Prime Minister, he/she should break the shackles of partisanship to embrace the inclusiveness of statesmanship.

    And the very nature of statesmanship dictates that the PM should free to appoint the best and the most capable to ensure that the welfare of the commons is always upheld which by default implies the appointment of capable non-political technocrats as well.

    Warrior 231.

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    1. Richest Man is Chinese in Hong KongFebruary 24, 2013 at 9:06 PM

      Group thinking is always better than one man show.

      The just published list of richest men in Malaysia in NST show that we need action to stop social inequalities from being worse.

      You will never be able to close the gap if nothing is done to curb the unequal playing field created by past Prime Minister.

      Mahathir managed to create billionaire class in Malaysia by creating policies that benefited him and his families and his chinese and Indian cronies.

      How did this happened? Mahathir achieved this by surrounding himself with right pr via NST, Munir Majid/Kalimullah etc and STAR and Utusan Zam Maideen.

      Looking back these are the main provider of information those days and he used it to the hilt to campaign for grandios projects. Hell it is still going on, Muhyudin the retard not comprehending that the people have caught on with this tactic. 1 billion for laptop by SKMM was not enough now he is campaigning for billions more free laptop for school children.

      Then the Education Blueprient, YTL and SAP prominently written in stone in the blueprint by the Education Ministry.

      Then there is the water shortage campaign when homes are being flooded every day haha. Now this is a good one. Water shortage in Selangor?

      The methods are simple but effective. Put a one sentence policy in SKMM or blueprint then award billions.

      With blogs you are able to make your views known but you must try harder to ensure that a few dont capitalise on UMNO to steal from the masses.

      The Chinese and Tamils steal via the top honchos of UMNO while the faithful clap their loyalty at every UMNO Convention such was the effect of lack of information.

      Hopefully this PRU13 can make a change for the good for the Malays.

      Who does Mahathir listen to? Tbose who came to see him with proposal. The YTL, the Vincent Tans, Syed Mokhtar.

      In his biography Syed Mokhtar disclosed he report to Mahathir every week! Now that is how to get listen to and also to receive monopoly/IPP/APs licenses.

      The fact of the matter is, if there is no structural requirement or legal requirement in Malaysia to listen to a think tank or Supreme Council, policies and wealth will be decided across tea at the PM house or office.

      So what is the use of these technical surveys? What we need is action from SPRM to investigate to do their duty and prosecute those with enormous wealth from illogical sources.

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    2. Warrior,

      The flaw in your scenario is that if you require the person in charge to know as much or more than his subordinates, that would disqualify practically every leader in both public and private sectors, whether CEO, minister, or middle management.

      The sum of human knowledge, even in very narrow technical fields, is too large for any one man or woman to encompass, no matter how much we'd like to pretend otherwise. In terms of the MOF, having an economics degree might be an advantage but not that much of one, because you don't learn much of the nuances and limitations of theory and practice at the undergraduate level - you might know just enough to be positively dangerous, but not know enough to realise it.

      The reality is that at the top level of decision making, 99.99% of the time it's subordinates who do most of the actual technical work. If there was a question of choosing alternative proposals on technical merit, it might boil down to the advocates of each position. There might not even be a right answer - we're not talking here about engineering remember.

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    3. @Richest man...

      Although I'm all for dealing with inequality, corruption alone is not to blame nor will tackling corruption and cronyism make any headway against the factors that do in fact matter. Corruption is worth fighting against in its own right, without needing the justification of reducing inequality.

      Also looking at who's the richest doesn't imply anything about the underlying distribution of income. The very rich are by definition outliers in the income distribution, and changing things at the upper tail doesn't do squat for the mass in the middle.

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    4. Sticking to the topic of Technical Competence of Policy Makers you make some assumptions that are not applicable in Malaysia.
      Firstly you assume the Policy Makers are not competent, secondly if they are competent, they are willing to help the people in general instead of their own cronies.

      The situation in the US is not like ere although it is naive to think that the policy makers of the west are all altruistic people. They are just as self serving as anyone on these planets. For example the tax system in the US are all full of exceptions
      for many business groups with the capability to influence the regulations, so what has competency got to do with developed democracies?


      Many people would be puzzled by your constant assertation to let the rich
      be very rich. Let the billionaires get away with their 40 billions of wealth
      because it will not help the poor or low income.

      "The very rich are by definition outliers in the income distribution, and changing things at the upper tail doesn't do squat for the mass in the middle."

      How do you come to these conclusions?

      Do these billions fall from heaven into Ananda Krishnan's lap? Or Tony Fernandes or Kuok's,Yeoh's lap? Doesnt the possibility that these billions came from the tax collection from many
      poor and low income and middle income individuals.
      These billions could only come from the aggregated collection of tax from many millions of citizens through the payment of electricity bill (IPP)s, the astro monthly bills (monopoly), the water bills, IWK bills etc.

      According to Husni the richest group in Malaysia have around 400 billions. How much is the Malaysian reserve?

      It is the policies that come from UMNO/MCA think tank that allows a small group of opportunists and those with power to tax the others that generate the great amount of wealth. So it cannot be said that reducing these taxes will not affect/improve the well being of the poor or middle class.

      Let us take an example the policy of billions of sugar subsidy. On the surface UMNO/MCA claims it is to reduce cost of cakes for the masses. But sugar is carcinogen in terms of diabetes. Sugar is poison health wise. The Health Ministry devoted budget to bring down sugar consumption at the same time the MOF keep the price of sugar low. Why? Because there are cronies who get these sugar subsidy. If sugar is expensive, food will be less sweet. Number of diabetes with legs amputated would be
      reduced and therefore health cost would come down. But there will be no Sugar King. There will be no sugar refinery in Sarawak.

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    5. Who said anything about letting the rich be rich, or that ill-gotten gains should be let be?

      Inequality is a much broader phenomenon than just the difference between the top 1% and everybody else. Focusing only on that difference misses almost all of the contributing factors underlying inequality of income and wealth. Just bringing down very top incomes doesn't solve inequality at all.

      It may be beneficial to do so on its own merits, but I'm not going to pretend that it goes anywhere beyond that.

      For some pointers, try this and especially this.

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    6. BTW, with respect to sugar, try this.

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  3. "The flaw in your scenario is that if you require the person in charge to know as much or more than his subordinates, that would disqualify practically every leader in both public and private sectors, whether CEO, minister, or middle management"

    I sincerely hope you are not writing the above in jest or just indulging in a bout of buffoonery to while away your time or was smoking some weed while posting that..ahahaha. And disqualified they rightly should be, because ignorance is no defense for reckless decision-making! And why the sly allusion to ‘engineering’, backhanded admission that econs is an inexact science at best, masquerading as the real thing.....hahahahaha

    Seriously though, it is patently absurd contentions like the one above that cripples the formulation and implementation of good policy that benefits the many instead of a select few. Pray, don’t you see the dangers of a fool or a court jester sitting in control of the exchequer and relying on advise he has little or no inkling of with regard to their rational validity or otherwise. Sir, wouldn’t it be ridiculous for a clown to nod in bewildered agreement at every suggestion whispered into his ear by an expert just because the clown wants to rid himself of the trouble of deciphering all that gobbledegook about say, ‘arbitrage pricing theory’ or ‘adaptive expectations’ so that he can revel in some tomfoolery and the commons be damned. Isn’t it the heights of stupidity to not contest or test the validity of a postulation and rely entirely on the good sense one’s advisors no matter however prepsoterous the same postulation may appear to be to an independent, objective observer?

    What is the point of advocates of particular viewpoints fulminating in your face with all their blather when you yourself cannot comprehend an iota of their bluster? How is one to make decisive and reasoned judgements when one is mired in the shifting sands of ignorance. The reason Bill Clinton’s presidency succeeded in terms of the economy was because Clinton was a policy wonk who could contest the arguments of Rubin, Greenspan et al and arrive at the best course of action. I am not saying a prospective MOF must be like Clinton, I am saying they must have a modicum of knowledge in the area they are entrusted with before they can peruse alternative scenarios, contemplate feasible options or initiate practical solutions.

    Indeed, it would be the a case of the sighted leading the blind over a fiscal cliff all because the blind did not equip himself with the vision or fore-sight to tease out the contradictions or the fallacies hidden beneath all that gloss. And at the very least a basic degree would constitute that modicum of knowledge with a PhD from a renowned School being infinite seminally better.

    The craft of statesmanship needs serious, knowledgeable captains to steer the ship through the hidden rocks in a roiling sea not country or village bumpkins out for a lark in the dark in the park. If not, we might as well appoint Nik Aziz Nik Mat as the MOF and watch him bankrupt the country with his simpleton notions of good housekeeping and his laughable homespun homilies spun from some infernal loom rotating endlessly between his earlobes. As they say “a little knowledge is a dangerous thing indeed” what more if it is zero knowledge!!

    Warrior 231

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    1. Warrior,

      Yeah, I was pulling your leg :) Unfortunately, the weed was somewhere else ;)

      I think the example you gave of Clinton actually demonstrates my point - Clinton was trained as a lawyer, not an economist or banker. When I mean a person of ability, it means someone with good cognitive and non-cognitive skills, and the ability to learn, not an ignoramus.

      Although I'll forbear to mention the relative lack of tertiary qualifications among many of our esteemed leaders.

      A couple more points here - political ability is probably just as important as technical capability. It's no good being able to direct and formulate good policy, if you can't sell that policy to your political party or the voting public. Again, Clinton's actually a pretty good role model here (e.g. passing NAFTA despite voter and Congressional opposition).

      Second, especially with respect to government functions that have regulatory oversight of the private sector, regulatory "capture" is an important consideration. You don't want a Minister of Housing who takes the side of developers, or a Minister of Health who looks out for the interests of doctors...or an SC chairman related to a listed company director, to give some (*cough*) hypothetical examples.

      God forbid we have a Minister of Finance or central bank governor who's an ex-banker (Henry Paulson, anyone? or Ahmad Don?). Would for instance, an educationalist who came up through the ranks in a university look at the failings in education...or promote the interests of the universities instead?

      There's always a risk when you put an expert in charge that he/she will have a stronger conscious or unconscious affiliation to his/her fellow professionals than with the general public.

      BTW, on a related note, I think you will really, really enjoy this:

      http://www.bookdepository.co.uk/Myth-Rational-Voter-Bryan-Caplan/9780691138732

      I have the audio version, but I'll do a post on it when I get a hard copy.

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  4. Ok we can agree to disagree with a few caveats thrown into the pot:

    1. Clinton was not all " a lawyer sawyer", he did have a modicum of an "economics brain":

    "he won a Rhodes Scholarship to University College, Oxford where he studied Philosophy, Politics and Economics, though because he had switched programs and had left early for Yale University, he did not receive a degree there."

    he definitely learned a lot more than fulltimers KJ or Tony Pua ever did, I presume ;)

    2. And being a law professor and an alumni of Yale Law school dint stop him from committing dastardly illegal deeds, for he is a irascible rascal all the same, though a lovable one at that. My all time favorite US President despite this:

    "Later, he was impeached for perjury and obstruction of justice in a scandal involving a White House intern, but was acquitted by the U.S. Senate and served his complete term of office."

    Lewinsky was poor taste 'walking', though admittedly Clinton would have earned my pardon if it had been Reeva Steenkamp!.....

    3. Funny thing, he had a liking for weeds which by the way is mind bogglingly reality altering, ask Coleridge, Clinton and me ;0 (hic) on that....hahahahaha

    But as a return shot across my bow, i am sure your "economics" will be flummoxed by this:

    "Prof Chen says his research proves that the grammar of the language we speak affects both our finances and our health.

    "Bluntly, he says, if you speak English you are likely to save less for your old age, smoke more and get less exercise than if you speak a language like Mandarin, Yoruba or Malay."

    http://www.bbc.co.uk/news/business-21518574

    Although I am quite perplexed as to how being fluent in Malay fits into the equation...you know. what will bright 'deranged' minds will think up next, i wonder....hahahahaha

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    1. Yes, I read that last night. It's an interesting notion, though I think the cause-effect still needs to be proven. I also wonder what he's using as the proxy for savings. AFAIK, household savings data is not published in some of those countries - ours certainly aren't. The national savings rate can't be equated to household savings, because its mostly corporate, not individual.

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  5. The Effect of Language on Economic Behavior: Evidence from Savings Rates, Health Behaviors, and Retirement Assets
    M. Keith Chen∗
    Yale University, School of Management and Cowles Foundation
    December, 2012
    Status: Forthcoming, American Economic Review, Vol 103(2)
    Editor’s Choice, Science Magazine, Vol 339(4)

    Abstract
    Languages differ widely in the ways they encode time. I test the hypothesis that languages that grammatically associate the future and the present, foster future-oriented behavior. This prediction arises
    naturally when well-documented effects of language structure are merged with models of intertemporal choice. Empirically, I find that speakers of such languages: save more, retire with more wealth, smoke less, practice safer sex, and are less obese. This holds both across countries and within countries when comparing demographically similar native households. The evidence does not support the most obvious forms of common causation. I discuss implications for theories of intertemporal choice.

    The full paper (56 pages of it) here:

    http://faculty.som.yale.edu/keithchen/papers/LanguageWorkingPaper.pdf

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    1. @anon,

      Danke. I'll have a read through when I have time.

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